General Motors Corporation officially originated the first-ever car loan in 1919. Since then, leasing has become an essential part of the automotive finance industry in regions like North America, Western Europe, and Japan. By the beginning of the 21st century, markets in China and Eastern Europe adopted automotive finance as part of their financial strategy as well.
A great shift in consumer preferences is currently changing the auto market affecting auto lending as well. Banks and lenders face a challenge – either to stay ahead of trends to remain competitive or be left in the basket. The motor finance industry is moving away from in-person car buying towards ultimate digitalization and ‘green lending’. So, how to stay in the auto lending game?
To help our auto financing clients navigate this changing landscape, we have researched the market to observe the expected state of auto finance in the upcoming years. The article consolidates our findings on potential growth opportunities, factors fueling the occurring changes, and current trends in the global auto loan market.
The Automotive Financing Market was valued at $245.62 billion in 2021 and as Mordor Intelligence states is expected to reach $300 billion by 2026, registering a CAGR of 6% during the forecast period (2021 – 2026). The rise in CARG demonstrates the market’s demand and growth, so we can expect the return to pre-pandemic levels once it’s over.
Automotive Financing Market – Growth Rate by Region, 2021-2026
Factor One: Increasing commercial and passenger vehicle prices
The commodity price inflation in the global market has forced auto manufacturers to increase vehicle prices during the last two+ years. In addition, growing taxes and stringent policies and restrictions made the boost in vehicle prices inevitable. BMW, to give an example, claimed to increase their prices for all their new cars by 1% on average. While Kia Motors has already increased their prices by up to $500 per car. However, as the welfare of people is steadily growing, customers opt for auto lending services to fulfill their needs for purchasing a new vehicle.
Factor Two: Emergence of online automotive lending platforms and apps
Digital lending services have emerged as the most destructive technology in the traditional auto loan industry. Hybrid and online-only platforms provide immediate access to lending services with easy viewing and applying functions for borrowers. Since the prices for vehicles are growing, borrowers show the demand for flexible services when they’re free to compare dozens of offers without leaving their home offices (this stimulates the demand for automotive finance services). Although the need for auto lending is mainly saturated in developed countries, developing countries are slowly joining the digitalization movement for auto finance software adoption and are expected to become a lucrative target market for auto lenders.
New Approaches in Auto Loan Market
The WEF Global Future Council Financial Monetary Systems report claims that “digital transformation in the financial sector is well underway and moving fast. With the right policy choices, we can turn these technological advances to the benefit of the whole society. To build flourishing ecosystems, it calls for cooperation between small and large, old and new players.” An AI-powered lending platform could bring such cooperation to an unprecedented level. In this scenario, banks will create new products and distribute them according to the growing demand from customers worldwide.
For example, the domain of modern automotive finance sees a transfer from a classic “bank (OEM) — client” approach to a new “bank (OEM) (classical financial institution) — in-house platform / P2P— the client” one. The model takes root in the wave of digitization that reduces both transaction and information costs while connecting clients with businesses. What’s more, this technological trend opened the market to players who couldn’t previously enter this sector due to high entrance costs.
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So what’s the deal? With the help of automation, a variety of processes are no longer processed manually leaving any place for human error. In monetary terms, the use of automated credit scoring results in reduced salary expenditures and operational costs such as the rent of big office space.
On the other side, clients gain access to credit resources online and they don’t have to spend a lot of time on the search. Hannah Keshishian, an automotive analyst at Mintel, explains that “consumers currently view the car purchasing process as a necessary evil they must be subjected to in order to get a vehicle. They tolerate the current process because they feel they have no other options in terms of where to purchase from; however, as younger generations grow into their purchasing power, they might look to startups and other disruptors that will give them the experience they seek.”
According to the HES FinTech survey, $250,000 — 300,000, for instance, are needed to start a lending business based on a P2P platform. This figure includes the development of the lending platform itself and variable costs.
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The Covid-19 pandemic caused companies to change their business model in favor of offering a streamlined and simple online financing environment to their borrowers. The economic uncertainty has forced people to postpone new and used cars purchase. Despite the expected slowdown in car sales, auto lenders noted a demand for servicing activity, such as refinancing and extensions. Auto lenders and car dealers are rapidly adopting digital tools to provide services remotely and follow other auto lending trends to remain competitive.
Here’re the auto finance industry trends to follow in 2022 and beyond.
In-house auto financing
The trend on in-house lending platforms has been here for a while since it provides a big opportunity for traditional auto lenders to digitalize their services and reach more customers.
According to statistics, auto dealers worldwide usually lack resources to teach staff and develop business processes. Besides, many of them still suffer from outdated technologies with slow processes.
Using such auto finance software, dealers and lenders do not need to hire a large staff team because most of the business processes are automatized by developers;
Common business processes of the lending industry are already installed on a platform. Developers just need to adapt them to a particular business request. What’s more, scoring algorithms of such solutions improve all the time, and potential customers get access to a relatively inexpensive, flexible, rapid, and more client-oriented alternative to classical services proposed by high street banks.
According to Wolters Kluwer, hybrid lending that used to be 80% offline and 20%, in many cases is now 80% digital and 20% offline. Many auto dealers already have online financing platforms installed. Maruti, for example, launched its digital car financing platform in July 2021. Their customers can choose the right finance partners and best-suited loan products. In addition, the platform allows completing all formalities related to auto loans and disbursal procedures. Carvana provides its own in-house financing as well as allows customers to lend from their partnering banks and credit unions.
The Carolinas Credit Union League (CCUL) claims that lenders with great digital experience have an opportunity to expand their customer base and work with borrowers from various geographic regions. CCUL advises lenders to speed up their digital transitions to online auto loans with support from trusted system providers.
Green lending and the rise of electric vehicles
Excessive investments in autonomous cars along with prompt financing from dealers and lenders are further contributing towards the growth of the global automotive finance industry. The CCUL notes that in the previous year, electric vehicle sales grew 45% year over year and accounted for about 8% of all new vehicle sales.
The demand for more luxurious and automotive cars is clear since about 50 million people get into road traffic accidents every year. Electric cars enable communication between vehicles, pedestrians, and road infrastructure. Passengers can be alerted to possible hazards that reduce car accidents and improve road safety globally. It’s estimated that by year’s end there will be more than 125 million electric cars on the world’s road, a 270% increase since 2018. As widely reported, Ford Motor Company alone is spending over $30 billion on electrification through 2025.
To put it simply, it’s the best time to start preparing for the growing adoption of electric vehicles and demand for green car loans (a type of car loan for zero-emission autos). Already lenders provide the green car lending options that in turn incentivizes customers to consider buying autonomous cars due to interest rate discounts extended repayment terms and more.
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Auto loan refinancing
Refinancing presents another competitive advantage for auto lenders. According to Transunion, 86% of customers who refinance auto loans save over $10 per month. This indicates that borrowers are ready to lessen monthly expenses even if the amount is below $10. It’s noted that 25% of existing auto loans can be refinanced letting borrowers save from $20 per month. This provides an opportunity to worth hundreds of US billions of dollars in potential auto lending.
Another reason making refinancing attractive for lenders is that there are fewer potential risks because these applicants already have experience with loan repayment.
According to McKinsey, lenders and leasing companies need to optimize collections and shift to more innovative funding tools, such as residual value-backed ABS. To help lenders HES can assist in optimizing finances and analytics by developing software with a calculated engine for the residual value. Companies need to have top-notch visualization tools to have a clear picture of every applicant.
Peer-to-peer auto lending
The global digital P2P lending platform market size is expected to grow up to $12,1 billion by 2023, at a Compound Annual Growth Rate (CAGR) of 18.7% for the forecast period. It means that more companies will likely switch to automation to improve their business processes with P2P solutions. The WEF report indicates that the industry of peer-to-peer lending is forecast to hit $1 trillion in global value by 2025. The main advantage of this approach for lenders is its unmatched flexibility paired with new offerings in lending services.
With ever-changing market conditions and consumer demands, a robust peer to peer marketplace software is a universal solution that can be used for different purposes. Now it’s time for all players to re-think what the new industry’s dynamics will mean for them. In tune with modern environmental trends, lenders can switch their product lines from classic automobiles to electric cars equipped with solar panels. From the data above, it’s evident that the LP&P2P industry offers a profitable investment opportunity for the next 10 years.
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Auto Finance Industry Trends: to Follow or Not to Follow?
A new vehicle or used car purchase is a big financial and emotional choice for every customer. But giving them the freedom to pick the most suitable financing opportunity is the best way to gain loyal customers for years to come. In this regard, green car lending, in-house financing, P2P, and refinancing cover all possible customer needs as well as provide an opportunity to reach various auto borrowers.
If you’re interested in optimizing your lending processes, HES is here to help. Get in touch with our team to get a free demo tour and explore our lending solutions.
